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Perspectives

March 5, 2009
Financial crisis upsets global economic order

European leaders are working towards economic cooperation.

As the financial crisis has spread throughout the globe, leaders in Asia and Europe have increased efforts to band together, coordinating economic action.  

Over the past few weeks, several regional meetings have taken place, bringing together leaders from a number of countries with vastly different economic systems. Ten member countries of the Association of Southeast Asian Nations (ASEAN) as well as China, Japan and Korea agreed to work together to maintain stable currency values. In Europe, several leaders agreed to double the resources of the International Monetary Fund to $500 billion.

These multilateral agreements come ahead of the scheduled G20 summit in April, featuring both advanced and developing economies.

Peter A. Petri is a senior fellow at the East-West Center in Honolulu and former dean of the International Business School at Brandeis University. He writes at the “East Asia Forum” blog that this level of global cooperation is unprecedented, and will change the face of the world’s economic order. 

Global response to economy in works

What do Berlin, Germany and Hua Hin, Thailand, have in common? Not winter weather, for sure. But this week, briefly, both offer a little sunshine for the world economy. European and Asian leaders meeting in these cities are pledging hundreds of billions of dollars for international financial rescue plans.

The bad news is that their actions reflect a rapidly deepening global crisis. The “other shoe dropping” in the downturn could be collapsing currencies and bankruptcy in several countries. This happened in Iceland, and it could happen soon in Hungary, the Baltic countries, Pakistan and others.

The good news is that leaders are beginning to fashion a global response to the crisis. This still faces many obstacles, but a “yes, we can” attitude is starting to emerge. It could bring benefits not just in stemming the meltdown, but also on other global decisions, like trade and climate change.

In Berlin, European leaders agreed to double the lending capacity of the International Monetary Fund to $500 billion. In Hua Hin this weekend, Asian leaders agreed to improve the structure of the Chiang Mai Initiative, the region’s emergency lending pool, and increase its size to $120 billion.

This is a sea change. A year ago, the IMF looked headed for extinction. Turkey was its only client and one-quarter of its staff opted for early retirement. The CMI, created after the 1997-98 Asian crisis, had never lent any money, and stood instead as a silent reminder of the difficulties of Asian cooperation. Now both are springing back to life.

It’s high time for global cooperation — but it has been hard to find a leader. The world’s economies need to work together to stop the “adverse feedback loop” that Federal Reserve Chairman Ben Bernanke highlighted in his Senate testimony on Tuesday. Every economy in recession buys less from others, and every bank that collapses puts others at greater risk.

China was one of the first countries to act, with a stimulus package of nearly $600 billion. The U.S. has now joined with its $800 billion package, and other countries are moving, too.

But most countries have stimulus packages well below 2 percent of GDP, much smaller than those of China and the U.S. Many still hope a world recovery will save them. Unless they act together, it won’t.

[…]In the ashes of the old economic order, a new one is taking shape. It will be based on a coalition of countries perhaps led, but not dominated, by the United States. It will require joint policies inconceivable in simpler times. With luck — and time — these could help to turn the global economy around and lead to more effective ways to govern our incredibly complex world.

To read more, see the original post.

The views expressed by contributing bloggers do not reflect the views of Worldfocus or its partners.

Photo courtesy of Flickr user viZZZual.com under a Creative Commons license.

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2 comments

#2

USA’s FAST ECONOMIC RECOVERY IN 2 STEPS

Step 1 – STOP THE BAILOUTS and FIX THE BANKS
– Solve the loan problem.
– Solve the derivative problem.
– Reassemble whole loan mortgages

The U.S. economy is shrinking fast, because businesses cannot get loans that they need to operate normally. Banks and lenders already own $ billions in bad loans, and they are afraid to make new loans. The government gave $ billions in bailout money for banks to start lending, but banks hoard the money to save themselves.

Our financial system became untrustworthy, because it mixed $ billions in bad loans in with the good loans. Now, banks do not trust any of the loans, and the entire credit market stopped working.

The U.S. economy will continue to shrink until we untangle the loans. Once the bad loans are isolated, they can be fixed one at a time. Then trust will be restored. Credit will flow, and the economy will grow.

So far, our government is spending $ trillions on bailouts and pork projects, out of ignorance and political ideology. The real solution is much less expensive than that.

The USA has fixed this problem before, and it is not hard to fix again. This is how:

A) Start with the Resolution Trust Corporation (RTC), which the federal government setup to solve a Savings and Loan problem in the 1980s.

B) RTC buys up securitized mortgages and derivatives to reassemble whole mortgage loans.
1. “Securitized mortgages” are home loans that have been bundled into large groups and sold to investors. A group of about 4,000 mortgages can be “securitized” and sold just like a stock or bond. Investors like to buy groups of mortgages because they receive all the monthly house payments.
2. Some groups of securitized mortgages were subdivided into smaller pieces, called “derivatives.” However, both of the fancy names refer to mortgage loans.
3. The problem is that many bad loans (with no payments) got mixed in with good loans. That turned the all the securitized mortgages into bad investments, which are ruining our banks. It is a huge problem, and the government has to fix it, before our economy will recover.
4. Total securitized mortgage and derivative market is estimated at $1.3 Trillion by a Professor of Economics at Ohio State University. (Also see the graph from Deutsche Bank at “The Death of Securitized Mortgages” http://www.nakedcapitalism.com/2008/06/death-of-securitized-mortgages.html )
5. Government should buy up securitized mortgages and derivatives at the lowest market price, which is set via a reverse auction. (Google on “reverse auction”.)
6. Squatters, who sit on their mortgage derivatives, in order to extort big $ from the rest of the system, can be forced to sell. (Law is analogous to eminent domain, or sales forced on cybersquatters that registered the domain names of well-established companies.)
7. Government pays mortgage derivative squatters at market price set by previous reverse auctions, perhaps with a penalty to the squatters.
8. Sellers give up all rights. No new law there.
9. Banks, investors, and insurers now have cash instead of questionable mortgage loans and derivatives. So, the banking system is healthy with cash to lend.
10. Credit will flow, and the economy will grow.

C) Government reassembles whole loans from securitized mortgage components and derivatives.

D) Government sorts the newly reassembled whole loans (mortgages) into groups according to risk/quality.
1. Government uses traditional mortgage experts and guidelines to sort the home loans into quality groups, for example, a high quality group would include homeowners with 20% (or more) equity in their house at today’s market price; and house payments that are 25% (or less) of homeowners monthly income.

E) Government (RTC) sells the reassembled whole loans to traditional mortgage banks.
1. This solves the problem of renegotiating home loans with homeowners. Read on.
2. Law must be changed so that reassembled whole loan mortgages cannot be securitized into derivatives, again.
3. An important purpose is to reconnect each homeowner with his lender, and vice versa.
4. It eliminates incentive for mortgage lenders to make predatory and junk loans. If the loan fails, the lender is stuck with a bad loan.
5. Government recovers much of the $1.3 Trillion purchase cost, because government auctions off the reassembled mortgages.
6. The lower quality, more risky mortgages would fetch a lower price at auction.
7. Mortgage companies, that buy the risky loans, will have more room to negotiate with the homeowners.
8. Some homeowner negotiations will not succeed. Those homeowners will move into affordable rentals. (The government does not owe everyone a free house.)
9. Other renters would like to buy those empty homes at reduced market prices.
10. If the government gets stuck with some homes, the government could profit by selling the homes when the housing market recovers.

F) Insurers like AIG may be reorganized through bankruptcy.
1. Securitized mortgage pools never made business sense, unless they were protected by various insurance schemes.
2. Those insurance schemes always were a scam.
3. Insurance only works when most of the insured assets are never hit with a disaster. That is why flood insurance does not work very well. A major flood ruins all the buildings in a large area, all at the same time. So, the insurance company goes broke, and people that bought the insurance are not protected. That is the problem with securitized mortgage insurance. In an economic downturn, the “disaster” hits all the houses at the same time. Securitized mortgage insurance was doomed to fail, and the insurance companies went broke in 2009.
4. Companies that ran the insurance scam may have to go through bankruptcy.
5. Never ending government bailouts for insurers like AIG are just throwing good money after bad. So, stop the bailouts.

This plan is inexpensive, tried and true. It leaves the banks healthy, with cash to lend. It restores trust in the credit markets, so loans will be made. It reassembles mortgage derivatives into whole loans, and restarts traditional mortgage lending. People can get loans to buy homes. Credit will flow, and the economy will grow.*

Step 2 – STOP THE PORK and START THE RECOVERY

*The economy will grow if President Obama’s massive tax, borrow, and spending plans can be stopped, before he creates another Great Depression. Presidents Hoover and Roosevelt already tried to tax, borrow and spend their way out of a recession in the 1930s. Instead, they created the Great Depression, which lasted 12 years. Straight as he goes, President Obama is doing it, again. Nevertheless, cleaning up the securitized mortgage mess is a necessary first step.

If President Obama announced Steps 1 and 2, today, the stock market would go up within hours. Investors love a real business plan, instead of a political pork plan. Millions of people will be wealthier, feel wealthier, and have more money to spend. That will jump start the economic recovery within days.

#1

How shall we now drink true Water from
an Empty Cup (financially or otherwise)?
When Life seems Empty and no true Liquid
(in itself) for us to drink, what shall we use
to quench the thirst which burns the tongue just as much as it did the Rich Man’s in Hell
(whether literal or metaphorical) when he cried out:
“Father Abraham, Have mercy on me, and send Lazarus, that he may dip the tip of his finger
in water and cool my tongue; for I am tormented in this flame!”
The Answer given did not satisfy
the Rich Man’s thirst (for more)…so, would it not have
been better, then, to have remained (in a lesser but more human state) as Lazarus…though
his Life may have seemed, till he died:
perhaps, more of an Empty Cup?…
And, did not Another, also, say:
“I thirst?!”

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